Title
A Framework for Identifying the Sources of Local-Currency Price Stability with an Empirical Application
Author(s)
Pinelopi Koujianou Goldberg Pinelopi Koujianou Goldberg (Princeton University, NBER, and BREAD)
Rebecca Hellerstein Rebecca Hellerstein (Federal Reserve Bank of New York)
Abstract
The inertia of the local-currency prices of traded goods in the face of exchange-rate changes is a well-documented phenomenon in International Economics. This paper develops a framework for identifying the sources of local-currency price stability. The empirical approach exploits manufacturers? and retailers? first-order conditions in conjunction with detailed information on the frequency of price adjustments in response to exchange-rate changes, in order to quantify the relative importance of markup adjustment by manufacturers and retailers, local-cost non-traded components, and nominal price rigidities, in the incomplete transmission of exchange-rate changes to prices. The approach is applied to micro data from the beer market. We find that on average, 54.1% of the incomplete exchange rate pass-through is due to local non-traded costs; 33.7% to markup adjustment; and 12.2% to the existence of price adjustment costs.
Creation Date
2008-03
Section URL ID
CEPS
Paper Number
185
URL
https://gceps.princeton.edu/wp-content/uploads/2017/01/185goldberg.pdf
File Function
Jel
C010, E500, F130, F320, G100
Keyword(s)
currency prices, exchange rates
Suppress
false
Series
3